Portable Alpha Daily

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Sunday, April 01, 2007

Alpha and the Week Ahead

Escalating trade tensions between the U.S. and China added to the existing uncertainty in the markets last week. China is the second-largest U.S. trading partner behind Canada and holds more than $400 billion of U.S. debt, adding to the concerns of investors who fret that every potential political dispute between the holders of U.S. debt and ourselves will prompt massive sell offs of treasury holdings. Rarely, if ever, do political disputes end up in imprudent financial market actions.

The Reuters/University of Michigan consumer-sentiment index fell to 88.4 in March from 91.3 in February and 88.8 in early March. Concerns about rising gasoline prices may have contributed to the decline, which matched economists' expectations. The National Association of Purchasing Management-Chicago said Friday that its index of manufacturing activity rose to 61.7 in March, from 47.9 in February, hitting its highest level in two years and marking the largest one-month movement in the history of the index.

In light of this week's consolidation we remain modestly Bearish as our long-term market model remains in the Bearish mode which it adopted as of December 8, 2006. The fury of recent up-days have not been accompanied by strong volume, which implies investor uncertainty that the recent rallies will continue, whereas volume on down-days has generally been higher adding to the negative bias. Many market followers believe the housing market will further deteriorate as credit is tightened and fewer borrowers will qualify for loans under tighter lending guidelines potentially resulting in further deterioration in Consumer Sentiment.

At this time we do not see any AAS Buy rated Broad Market Indices as attractive alternatives for seeking alpha. Of the Style choices Mid Cap Growth (JKH), Value (JKI) and Core (JKG) come up as highly rated Neutral-rated styles with Small Cap Growth (JKK) and Core (JKJ) similarly rated. If you are inclined to venture into the market in the coming week we suggest focusing in the Mid Cap area. Experience teaches that Small Caps are much more volatile in times such as these which are charged with economic uncertainty.

Energy, Utilities, Basic Materials, Global Energy and Natural Resource are the leading AAS Buy rated Sectors at the time. ETF’s which work into this strategy are iShares DJ U.S. Utilities (IDU), iShares DJ U.S. Energy (IYE), iShares GS Natural Resource (IGE), iShares S&P Global Energy (IXC) and iShares DJ U.S. Basic Materials (IYM).

Mutual Fund investors seeking to use Fidelity Funds might look at Fidelity Select Utilities Growth (FSUTX), Fidelity Select Energy Service (FSESX), Fidelity Select Materials (FSDPX), Fidelity Select Natural Gas (FSNGX) or Fidelity Select Energy (FSENX).

Those of you who prefer the trading feature of the Rydex Family of Funds should look at Rydex Energy Services (RYVIX), Rydex Basic Materials (RYBIX), Rydex Utilities (RYUIX), Rydex Commodities (RYMBX) or Rydex Energy (RYEIX).

ProFunds offers a more aggressive alternative for those with their Ultra Sector Funds. These fund alternatives seek to match approximately 150% of their underlying benchmark. For those so inclined look into the ProFund Ultra Sector Basic Materials (BMPIX), ProFund Ultra Sector Oil & Gas (ENPIX), and ProFund Ultra Sector Utilities (UTPIX). The ProFund Ultra Mid Cap (UMPIX) fund differs slightly as it seeks to return 200% of its underlying benchmark. Lastly the ProFund Small Cap Growth (SGPIX) tamely aims at simply matching its benchmark.

There are many individual equities that are currently rated an AAS Buy and which fall into the Mid Cap Style groups and come from within these sectors. For those interested take a further look at Grant Prideco Inc (GRP), Albemarle Corp (ALB), Cooper Cameron Corp (CAM), Tidewater Inc (TDW), Northeast Utilities (NU), Equitable Resources Inc (EQT), Helmerich & Payne Inc. (HP) Noble Affiliates Inc (NBL), FMC Technologies Inc. (FTI) or Southwestern Energy Co (SWN).

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – AAS Model Portfolios are allocated at 50% cash and 50% long.

Top Alpha Generating Securities
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Major Market ETF – iShares S&P Mid Cap 400 (IJH 3/20/07)

Top Style-Box ETF for Alpha – iShares Morningstar Mid Cap Growth (JKH 3/20/07)

Top Sector ETF for Alpha – iShares Dow Jones U.S. Utilities (IDU 3/12/07)

Top Long Stocks for Alpha

Precision Castparts Corp. (PCP 9/20/06)

Martin Marietta Materials Inc. (MLM 11/6/06)

RTI International Metals (RTI 10/11/06)

U.S. Steel Co. (X 2/28/07)

Brush Engineered Material (BW 3/6/07)

MEMC Electronic Materials Inc. (WFR 1/8/07)

Blue Coat Systems Inc. (BCSI 3/1/07)

Chaparral Steel Co. (CHAP 11/1/06)

Cleveland-Cliffs Inc. (CLF 11/17/06)

Universal Corp. (UVV 11/29/06)

Top Short Stocks for Alpha

Beazer Homes USA Inc. (BZH 1/25/07)

Meritage Homes Corp. (MTH 12/18/06)

Fremont General Corp. (FMT 12/29/06)

The Ryland Group, Inc. (RYL 2/20/07)

Advanced Micro Devices Inc. (AMD 9/27/06)


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